Rupee to depreciate slightly over next 12 months as dollar continues its rally, says poll

The Indian rupee is expected to depreciate marginally in the next twelve months, tracking strong dollar, a Reuters poll showed. 

The dollar has had an almost unbroken rally since June as strong growth in the world's top economy raised hopes the Federal Reserve will hike rates around the middle of this year - the only major central bank seen tightening its policy at a time when others have either cut interest rates or added stimulus.

That poll also showed long positions on the Indian rupee were near a two-month high, although the latest survey found the currency is seen remaining around current levels of 62.15 for most of 2015, before weakening slightly to 63.50 a dollar in 12 months.

Expectations of economic reforms that could attract investors and lower the country's current account deficit will likely aid sentiment in the domestic economy, which is also Asia's third-largest economy, especially after the government announced a budget last week that focussed on keeping a lid on borrowings while increasing spending on infrastructure.

The Reserve Bank of India (RBI) has embarked on a policy easing cycle, slashing the repo rate twice this year as inflation subsides. Consumer prices rose 5.11 per cent in January, a steep decline from the double digit inflation just over a year back.

"The RBI may be more tolerant of currency appreciation going forward because of some probable upside trajectory in consumer prices," said Nizam Idris, head of FX strategy at Macquarie Group.

The RBI and government overhauled the country's monetary policy this week by introducing an inflation target ceiling of 6 per cent in two years time.

The poll also showed that Chinese yuan will likely rise only slightly over the coming year as broad dollar strength, the threat of deflation and weak economic growth raises the chance of further stimulus from the central bank.

The People's Bank of China cut its lending rate last week, the second such move since November, in an acknowledgement of the risks that weak demand and a housing slump pose to the economy. Further easing is expected in coming quarters.

Premier Li Keqiang announced a growth target of around 7 per cent for 2015 at the country's annual parliamentary meeting on Thursday, the weakest pace of expansion in generations and a shadow of the double-digit growth rates China is accustomed to.

The poll of 25 currency strategists this week showed the yuan will appreciate slightly to 6.24 in three months, 6.22 in six months and 6.19 in a year. On Friday it was around 6.26.

"Inflation will remain pretty low for China and probably the threat of deflation will require the PBoC to ease", said Idris.

The yuan has lost over 2 per cent since the PBoC started cutting interest rates in November.

Inflation has also steadily cooled in China to just 0.8 per cent annual rate in February owing to a steep drop in the price of crude oil, nearly 50 per cent since June, and commodities.

Producer prices at Chinese factories have now been falling for nearly three years.

A separate poll of currency analysts on Thursday showed short positions on the yuan hit a near five-year high in the last two weeks. [ASIA/FXP]

(Reuters)